nottheaverageactuary

Actuarial news and views from Cape Town and beyond

Hedge Funds

4 Comments

Hedge funds is one of those common phrases that you hear in issues relating to business.

Investopedia more or less defines hedge funds as pooled funds that use a number of strategies (aggressive management and derivative trading to name a few) to generate high returns.

Hedge funds appear to be some form of collective investment scheme, yet no mention is made of them at all in chapter 18. The definition offers a possible explanation for their omission: they make use of risky strategies to generate high returns. The nature of these funds are perhaps inappropriate for pension funds and insurers to use as major investment vehicles.

A report by a German asset and wealth manager mentioned that insurers invest minimal amounts in hedge funds due to the amount of solvency capital that has to be held due to the limited liquidity and transparency of the schemes. The report did however, that they could become accessible if appropriate changes are made in the insurance environment.

Closer to home, a moneyweb article, published recently, suggested that local based pension funds could and should increase their allocation of funds in alternative investments such as hedge funds. High fees, a lack of preservation of funds and a national average Net Replacement Ratio of 12% were used to support this view.

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4 thoughts on “Hedge Funds

  1. Thanks Israel, for the link to the comprehensive definition and how it fits in our world today. The first link touches on this slightly, but I think the name of hedge fund can be slightly misleading – I initially thought it was some sort of an investment vehicle with the primary purpose of reducing risk (hence the word “hedge”).

    And the low net replace ratio of South African population is quite worrying – 12 % compared to the OECD average of 69%. I don’t know how long this gap has been around for, but I hope it gets narrower soon. This is particularly worrying because South Africans aren’t best when it comes to saving (I heard it on the radio some time ago); which means many of the elderly individuals will have to depend on their younger family members. This is also exacerbated by the high unemployment rate, especially among the youth. I think that’s enough pessimism for today; I really hope things turn around for the better.

    • ________________________________

      Thanks for the feedback Choong!

      The low NRR is a bit troubling, but judging from experience I gues that the vast majority of South Africans expect to look after their parents after retirement. Such an arrangement may not necessarily involve staying together with their parents, but rather sending them money. The amount of money they need depends on where they live, and I guess that quite a number of the elderly live in rural communites, so post-retirement expenses may not be too high.

      I think that the NRR may improve for years to come, given the hype around the so called “black diamonds” who form a significant proportion of the current labour force.

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